Competition with China

The world crisis will strengthen the competitive advantages of China over Latin America.

While the Mexican peso, the Brazilian real and the Colombian peso have depreciated about 30% since the middle of last year, the Chinese renminbi has continued its gradual appreciation, unscathed by external volatility. Since June last the Chinese currency has gained 16.6% in real effective terms.

So at first sight, Latin American industrial companies have improved their competitiveness on external markets against the once fearsome Chinese companies. It is said thousands of Chinese companies which depended on exports of footwear, toys and other world consumer products have gone bankrupt.

Is this the end of Chinese industrial dominance? Nothing further from the truth. Despite the publicized closures of companies and firings of workers, China is one of the few countries in the world where industrial production has continued to gain ground. With 7.3% growth in the first four months of this year, Chinese industry is the envy of all developed countries, where recent falls have averaged 15%, or of the Latin Americans, where output has fallen between 11% and 25% in Argentina, Brazil, Chile, Colombia, Mexico and Venezuela.

Workers’ wages, which in China have doubled in the last four years, are now falling due to the downturn in construction and massive layoffs in the industries that export less sophisticated products. The costs of domestic transport are falling and the cost of ocean freight from China has fallen by about two thirds since last September. Consequently, the competitiveness of the costs of Chinese products is improving at a rate difficult to imagine only a year ago, and which is not seen in Latin America.

Even more serious, the structural conditions for achieving improvements in productivity seem more promising than ever in China, and more fragile in many of its competitors, especially Latin America.

China is committed to a fiscal stimulus policy which has no parallel in the rest of the world, not even among developed countries, which explains a good part of why it has succeeded in keeping growth above 6% even though its exports fell 17% in the first quarter of this year. The 8% growth target for this year, which was in doubt, now seems totally feasible.

The attraction of an enormous domestic market in expansion has revitalized the interest of large multinationals in China, which are now finding other destinations less attractive. Intel is closing its plants in Malaysia and Philippines and opening a giant plant in Chengdu. IMI PLC, a British giant in the machinery and equipment sector, is cutting its world workforce by 10% to concentrate its efforts in China.

But the most important aspect of the Chinese fiscal stimulus program is not that it will help buoy domestic demand but that it will strengthen physical infrastructure and human capital, which are two fundamental pillars of competitiveness over the long term. While in Latin America there is a massive postponement of private investment programs, and only a few governments have the capacity to speed up their, in general, modest investment projects in infrastructure, in China fixed investment increased 28.8% in the first quarter, four points faster than a year ago.

And while universities and training centers in Latin America will very soon face budget cuts due to lack of public funds and students with capacity to pay, a non-negligible part of the Chinese stimulus package will go to training workers and expanding places in professional and technological programs.

When the dust cloud of the crisis has settled, the world is going to find a more modern, technologically-updated and competitive Chinese industry. Latin America should not wait for that time but should adopt as soon as possible a real policy for industry and innovation to promote ambitious infrastructure projects in association between the public and private sectors, and to raise the standards of quality in technical and professional education.